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HELOC versus HELOAN: What’s the difference?

Did you know you can access your home’s equity without selling your home? A home equity line of credit (HELOC*) and a home equity loan (HELOAN*) are both types of financing that allow you to borrow against the equity you’ve built in your home. With the money you receive from these home equity options, you have the flexibility to tackle home renovations, consolidate debts, invest in education or meet other financial goals that are important to you.

In this article, we’ll explore the similarities and differences between HELOCs versus HELOANs and if using your home equity as collateral is right for you.

What’s home equity?

Home equity refers to the portion of your property that you truly own. It’s the value of your home minus what you owe on your mortgage. At closing, the only equity you have in your home is likely from your down payment. But every time you make a mortgage payment, you reduce your debt which may build your home equity. The second way to boost your home equity is if your property’s value goes up. If the housing market is doing well or you make improvements to your place that make it more valuable, your home’s worth can increase. HELOCs and HELOANs are two common ways homeowners access their home equity.

What’s a HELOC, and what are the qualifications to get one?

A HELOC is a line of credit secured by your home. You can use your revolving credit line to tap into the equity you’ve built up in your home for large purchases such as tuition, renovations and emergency expenses. Since HELOCs rely on your home’s equity, you can’t borrow more than the value of equity in your home, which is the appraised value of your property minus the remaining balance on your mortgage.

With a HELOC, you have the flexibility to borrow and repay as needed, and you’re only charged interest on the outstanding balance. For example, if you have a HELOC limit of $50,000 but only use $20,000 for a home improvement project, you’ll only pay interest on that $20,000 rather than the entire $50,000.

In addition to your credit history, your income, debt, employment situation and other factors relating to your ability to repay the loan will play a role in qualifying for a home equity option.

What’s a HELOAN, and who qualifies?

A home equity loan (HELOAN) provides up to 95 percent of your home’s equity as a piggyback second mortgage. The HELOAN is an additional loan you take out on top of your existing mortgage, which results in two separate loan payments. In contrast, a cash-out refinance transforms your first mortgage into a completely new mortgage.

A HELOAN offers flexible loan terms and fast funding. Credit scores as low as 640 may qualify for a HELOAN.

HELOC versus HELOAN: How do they compare?

One of the main differences between these home equity options is related to borrowing flexibility. With a HELOAN, you receive the money you’re borrowing in a lump sum payment. However, you can draw money multiple times from an available maximum amount with a HELOC. Here are other ways to compare a HELOC versus a HELOAN:

BorrowingBorrow funds as needed during the draw periodReceive a lump sum upfront
CollateralYour home’s equityYour home’s equity
FlexibilityOption to borrow, repay, and re-borrowNo additional borrowing once loan is repaid
Loan amountUp to $750,000Up to $500,000
Loan typeRevolving line of credit, similar to a credit cardLump sum loan
Percentage of home’s equityUp to 95 percentUp to 95 percent
Property type​​​Primary residence, second homes and investmentsPrimary residence, second homes and investments
Rate optionAdjustable-rate option​​​Fixed-rate option

Which is best for me, a HELOC or HELOAN?

First, consider how much money you need and your plan for using it. While the funds can be used for any purpose, Experian advises that a HELOC can be a convenient source of cash to pay for home improvements completed in stages. That’s because you can draw money as you need with a HELOC. In addition, if the home improvements add to your home’s value, the interest paid on the HELOC may be tax-deductible. Other recommended ways to use a HELOC are for major home repairs, financial emergencies and paying off credit card debt.

According to The National Association of REALTORS®, smart uses for HELOANs are also home improvements and paying off higher-interest debt. Using home equity loans for education is also common, as is using the funds to buy a car or for a down payment on an investment property.

Using your home equity for discretionary spending, like a vacation, is not recommended.

Guild Mortgage can help you make the right decision

Our loan officers will use their experience and expertise to help you find the right home equity option and guide you throughout the loan process. Connect with a loan officer for more information.

*These are brokered loan products. State restrictions and eligibility requirements will apply based on investor guidelines.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.

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About the Author: Guild Mortgage

Founded in 1960 when the modern U.S. mortgage industry was just forming, Guild Mortgage Company is a nationally recognized independent mortgage lender providing residential mortgage products and local in-house origination and servicing. Guild’s collaborative culture and commitment to diversity and inclusion enable it to deliver a personalized experience for each customer. With more than 4,000 employees and over 250 retail branches, Guild has relationships with credit unions, community banks, and other financial institutions and services loans in 49 states and the District of Columbia. Guild’s highly trained loan professionals are experienced in government-sponsored programs such as FHA, VA, USDA, down payment assistance programs and other specialized loan programs. Guild Mortgage Company is a wholly owned subsidiary of Guild Holdings Company, whose shares of Class A common stock trade on the New York Stock Exchange under the symbol GHLD.